Jelena McWilliams, a bankruptcy trustee at Synapse Financial and former president of the Federal Deposit Insurance Corp., said the fintech middleware company’s bankruptcy in April was “devastating” for ordinary customers.

Bloomberg News

WASHINGTON – At this point, Imene Haddad feels like she’s tried everything.

His account with the fintech app Juno – which contained about $26,000, his entire life savings – froze last month. She, along with tens of thousands of others hit by the bankruptcy of fintech middleware company Synapse they found themselves unwittingly forced to navigate the challenge of unknown Washington agencies while trying to recover money that, in many cases, they thought was safe.

Haddad, the 39-year-old single mother from West Palm Beach, Florida, had a mortgage payment due, and the bank that she said held her funds — Evolve — couldn’t allow her to access them.

She contacted the Consumer Financial Protection Bureau, thinking that, surely, a consumer protection agency would be able to help her regain access. The CFPB referred it to the Federal Reserve (which regulates Evolve). The Fed sent it back to court to deal with the Synapse bankruptcy case.

He has tried his lawmakers — Sen. Marco Rubio, R-Fla., in particular. Haddad said he has not received a response from his office. (Rubio’s office did not respond to American Banker’s request for comment.)

“I’m running out of ideas on who to contact,” he said. “I’m terrified, because this is everything I’ve worked for my whole life.”

Haddad’s savings are implicated in the increasingly complicated bankruptcy case of Synapse, which served as an intermediary between customer-facing fintech apps and FDIC-insured banks.

The case, needless to say, was difficult. There is an estimated $85 million shortfall between what Synapse’s former partner banks hold and what consumers are entitled to. according to documents filed with the court by Jelena McWilliams, a Chapter 11 bankruptcy trustee and former president of the Federal Deposit Insurance Corp.

Just last week, Evolve filed a letter with the bankruptcy court that $109 million in deposits for another fintech app called Yotta have vanished in synapse collapse. Evolve and Synapse can’t agree on who is responsible for Yotta’s missing funds or frozen accounts.

McWilliams on Thursday took the unusual step of asking U.S. banking regulators to provide resources and aid communication between banks and consumers. The failure, for ordinary consumers, he said, was “devastating.”

Until these discrepancies are resolved, people like Haddad will be forced to wait.

Imene Haddad, of West Palm Beach, Florida, has about $26,000 in an account with fintech Juno that she has been unable to access since the collapse of fintech middleware provider Synapse in April. Thousands of fintech customers across the country have been locked out of their accounts after the Synapse collapse and have been unable to find anyone who can definitively tell them if and when they will get their money back, exposing regulatory gaps among banks and their fintech partners.

Hymen Haddad

“I didn’t expect this to happen in this country because I thought we were protected from something like this,” Haddad said. “He shook my faith. I have nothing left.”

Who will you call?

Patty Newman, who asked to use her maiden name, created an account through Yotta in 2022, attracted by the interest rate offered on her savings compared to what she could get with a traditional savings account.

“My frozen funds are my emergency fund — money I can use when things break or something goes wrong in life,” she said. “It took about two years of saving to get that little emergency fund together. It’s not a lot, certainly not what an emergency fund should be, but it’s a good start and it’s important to have.”

Newman liked that Yotta encouraged her to save. She also liked that Yotta told her that her money was insured by the FDIC.

“I feel like I did my due diligence: I researched Yotta, made sure it was FDIC insured, as advertised, and read reviews and articles about it,” he said.

But, as Newman, a retired teacher, and many others would learn, FDIC insurance only comes into play when a bank fails, not a third-party fintech.

“I made the best decision with the information I had at the time,” he said. “Yet now I’ve learned a new vocabulary: fintech, neobank, third-party pass-through, BaaS. All things I had no knowledge of before.”

Often, these types of arrangements – in which a fintech company takes a deposit from a consumer and has a relationship with a banking institution as a service – operate through a “For Benefit Of” or FBO account. The fintech company should take the consumer’s deposit and open a bank account in his name.

In the event of a bank failure, the consumer would receive FDIC insurance of up to $250,000.

But sometimes the relationship between the deposit insurance company, the fintech company and the bank is not clear to the consumer. And just as often, the deal includes intermediaries like Synapse that make the flow of deposits even more complicated.

“People assume that when they deposit their money with some type of financial institution or bank-type financial company that their money is safe,” said Chris Odinet, a professor at the Texas A&M University School of Law. “Of course the reality is that there is a very different set of rules and protections between what you do with a bank and what you do with anyone else.”

All of this left Newman’s money in a regulated no-man’s land.

The FDIC, which is expert at stabilizing customer accounts when a bank fails, cannot intervene because no bank has failed. The CFPB has limited authority in cases where the bank has less than $10 billion in assets, and the Fed, which has issued a consent order against Evolve over the way it manages its fintech partnershipsIt moves too slowly for consumers to try to access their money to pay for groceries or housing.

The FDIC has been trying to crack down on how banks don’t advertise deposit insurance in these types of pass-through or FBO arrangements. The agency finalized a rule late last year that outlines how FDIC insurance can be representedand issued consent orders to businesses like Sam Bankman Fried’s now-defunct FTX cryptocurrency exchange.

“Consumers do not have – nor should they have – this technical knowledge about banks and non-banks,” Odinet said. “So instead it undermines confidence in the banking system overall. And that, from a public policy perspective, is really a problem.”

But as it stands, it’s up to consumers to read the “fine print” about how fintech-bank deals work and understand the extent to which they are protected in the event of failure, said Carla Sanchez-Adams, a senior attorney at the National Consumer Law Center.

“The way these products are marketed and the way people understand them, in consumers’ minds they associate them with a bank account,” he said. “The challenge with all this is that the further away you are, the greater the chance of failure and the funds being missing somewhere.”

In the last month, Newman said the FDIC has told her they are monitoring the situation in bankruptcy court, the CFPB has referred her to the Fed, the Fed board has forwarded her to the St. Louis Fed and the OCC acknowledged and closed its complaint. She has contacted the White House, the Senate House Banking and Financial Services Committee and other individual lawmakers, as well as FINRA and even the Better Business Bureau.

Every morning, look for news on social media and check the bankruptcy court docket. Every Thursday at 6pm he checks McWilliams’ trustee status report and on Fridays he listens to court proceedings.

“It seems like I’ve turned it into a full-time job,” he said.

You can’t get there from here

It is still possible that some of the protagonists of the Synapse failure, in particular the partner banks, face further scrutiny from regulators as consumer harm comes to light.

And while Washington’s regulatory wheels often move too slowly for people caught in the middle, Synapse’s failure could represent a watershed moment for the regulation of banking-as-a-service.

“I think this is a moment that highlights the urgency of solving the concept of banking-as-a-service,” said Adam Rust, director of financial services at the Consumer Federation of America. “An event like this may not have been expected, but now here we are, and the question is: How can we protect depositors?”

Although current trustee McWilliams and other Trump-era regulators pioneered this type of partnership during their time at the top of banking agencies, THE The last few years during the Biden administration have brought a series of enforcement actions aimed at how banks manage their relationships with third parties, including fintechs.

Banking regulators have several levers to pull, Rust said. The FDIC could issue additional guidance requiring those seeking FDIC insurance for their products to more explicitly and visibly call out the terms of such agreements, and all prudential regulators could hold banks more accountable for the actions of their fintech partners.

The Senate Banking Committee is reaching out to regulators to find a response to the failure and plans to pressure the fintech company’s investors and partner banks to give customers access to their money back, according to a person familiar with the committee’s workings .

The House Financial Services Committee did not respond to American Banker’s request for comment.

Sanchez-Adams said the CFPB could possibly use its authority under the Electronic Fund Transfer Act or over unfair, deceptive or abusive acts or practices to prosecute one or more plaintiffs in the Synapse case.

“But it’s not something that can happen overnight,” he said.

Congressional action that closes regulatory gaps that have left consumers in the lurch this time would be ideal, Odinet said. There is currently no legislation expected to be considered before the end of the year that addresses bank-fintech partnerships, but Odinet says that until such a measure is adopted, these issues will persist.

“This won’t be the last time this happens,” he said.

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